Wall Street regained its composure Monday after an out-of-the-blue profit warning from Compaq Computer knocked the market for a loop.
Although tech stocks never quite managed to find their footing, the Dow Jones Industrial Average rebounded from a more than 70-point decline to close 165.67 points higher at a record 10339.51. The blue-chip index was underpinned by a solid showing in the financial sector, where securities house Bear Stearns (BSC) blew away estimates with record quarterly income of US$1.42 a share. Earnings expectations are running high as well for other financial firms.
This offset much of the weakness on the tech side of the fence. The Wired Index gained 11 to 685.53, while the Nasdaq Composite Index was up just 5.69 at 2598.74. The S&P 500 rose 10.29 to 1358.64. The gains may have been modest, but at least these were all record highs.
Both the Nasdaq and S&P 500 also hit all-time highs on Friday. Then Compaq (CPQ) weighed in after the closing bell with word that tougher competition and sagging sales would result in quarterly earnings of 15 cents a share, or about half what analysts had been expecting. Ouch. With the entire weekend to mull that unhappy news, traders returned to work Monday and proceeded to dump just about any stock within reach.
It didn't take too long, though, for people to realize they'd overreacted a bit. Piper Jaffray analyst Ashok Kumar told clients that "the PC market is in a 'Goldilocks' state -- neither hot nor disaster, just lukewarm." And Bill Gorman of PNC Asset Management, who told Market Cap on Friday that computer sales have strengthened considerably over the past three months, noted that much of Compaq's difficulties stem from its efforts to follow Dell Computer down the build-to- order road. "Compaq is still trying to find its way," he said.
For Rao Chalasani, chief investment strategist at Everen Securities, the key element here is distribution. "Prices are coming down and you need a lot of volume," he said. Companies like Dell, with well-established distribution channels, should manage to accommodate the lower profit margins that result from fire-sale discounting.
Still, the Street made its displeasure with Compaq's sneak attack evident. The company's stock tumbled 22 percent to $24.06, and was downgraded by no fewer than nine leading brokerages. The disappointment spread to other PC makers and their brethren. Dell (DELL) slid $1.75 to $41.81, Hewlett-Packard (HWP) fell $1.19 to $68.44, and Microsoft (MSFT) was $1.25 lower at $93.
Also weighing on the tech camp was BancBoston Robertson Stephens slashing Intel's rating to "long-term attractive" from "strong buy." The firm's analysts aren't thrilled by Intel's chances as it dukes it out with rival chipmakers in the low-end consumer market. Intel (INTC), which is expected to post quarterly profit of 55 cents a share on Tuesday, lost $4.13 to $61.25.
Take this with a grain of salt. "We feel very confident about Intel," said Everen's Chalasani.
International Business Machines (IBM) couldn't buck the downtrend even as it announced a tie-up with RealNetworks to develop new-and-improved ways to transmit music over the Net (trumping a similar such announcement from Microsoft expected on Tuesday). IBM eased $2.88 to $183.44, while RealNetworks (RNWK) was up 19 percent at $247.
Disney (DIS) gained 94 cents to $35.44 on speculation that the Mouse House is looking to cash in on the mania for Net stocks by consolidating some of its online assets in a separate publicly traded company. Meantime, The Wall Street Journal reported that talks are under way for Team Mickey to take a majority stake in Infoseek sooner than expected. Infoseek (SEEK) advanced 13 percent to $87.13.
Is there a Romeo standing below Xoom.com's balcony? The online community builder said it's in talks with a potential suitor about buying a controlling stake in the company, but declined to say who that suitor might be. The rumor mill quickly named a likely suspect: NBC, which has made no secret of its desire for a greater presence on the Web. Xoom (XMCM) climbed $6.75 to $76.88 amid speculation that a buyout is imminent.
For its part, CBS (CBS) slipped 19 cents to $44.75 after saying it will purchase a 35 percent stake in a new joint venture that will run the Hollywood.com online movie site, and that it will spend millions promoting its Internet properties. The network's joint-venture partner, Big Entertainment (BIGE), soared 106 percent to $32.38.
Investors still think online brokerages can do no wrong. Ameritrade (AMTD), which is slated to report its quarterly earnings on Thursday, surged 23 percent to $142.25. ETrade Group (EGRP), meanwhile, advanced $5.88 to $96 as it unveiled a new ad campaign aiming to be "a strong call to action in the age of self-reliance and personal empowerment," as one company official termed it.
This is investing we're talking about here, right?
You can't fault a company for championing its own success, but you have to wonder why traders are sometimes so willing to buy into the hype. Case in point: Net.B@nk (NTBK), an online financial institution, vaulted 33 percent to $158.50 after its chief exec, DR Grimes, told an interviewer that the company is expanding faster than earlier estimated. Subsequent news reports touted Net.B@nk's forecast of a 51 percent increase in growth.
Um, OK. Except here's what Grimes actually said: "If I added 3,300 accounts last month, right? I've got nine more months left this year, right? So if you do the math, that'd be 29,000. And I'm sitting at a little over 24,000. So, maybe 53,000. I'm just giving you a rough number ... I'm simply saying that if we continue to grow at the rate we grew last month, we're looking at an obviously much bigger number. So even if you took those numbers and added them together, you would still be looking at a number much above the 35,000 that we had been projecting."
Similarly, when asked about a possible stock split, Grimes observed, "We do have a shareholder's meeting coming up, don't we?"
Yes, we do. And maybe Net.B@nk really is poised for greatness. But more levelheaded investors will wait to see the company actually come through with the goods before driving its share price through the roof.
Lastly, HJ Heinz (HNZ), the ketchup guys, rose $1.69 to $46.25 after the Financial Times reported that more than 20 prospective buyers have stepped forward to acquire the company's Weight Watchers International unit.
There will be those who wonder what the producer of Ore-Ida Tater Tots is doing in the diet business in the first place. But, hey, it's no less mystifying that a top player in the get-slim movement also happens to be one of the world's leading manufacturers of pet food.
